ICAEW.com works better with JavaScript enabled.
Economic Insight

UK Business Confidence Monitor: National

An authoritative and authentic check on the nation's economic pulse, Q1 2022.

The latest Business Confidence Monitor (BCM) shows that business confidence is returning towards pre-pandemic levels. It remains high as is supported by strong domestic sales. As the economy expands, businesses are facing significant challenges with recruitment and skills shortage, transport problems and rising input costs, which could hinder further growth.

The results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions, and company sizes, ensuring a representative picture of the UK economy. The interviewing is continuous, the latest findings are based on the period between 18 October to 14 January 2022.

Key points

  • Business confidence is easing back towards pre-pandemic normal, after having reached a record level in Q3 2021. The emergence of the Omicron variant, but also the evidence that it was less of a threat than initially feared, affected the path of confidence during the quarter.
  • Strong domestic sales growth, both recent and expected, is probably the main factor supporting confidence. However, export sales are not yet back to pre-pandemic rates of growth and expectations are also muted.
  • Challenges continue to grow, particularly related to staff recruitment. Staff turnover and skills availability are, for the first time, the fastest growing challenges facing businesses. Transport problems remain prominent, while taxes and the availability of government support for business are emerging concerns.
  • Both input prices and salary costs are rising and are expected to continue doing so. But productivity gains, a fall in spare capacity, and rising selling prices are supporting the growth of profits, and hence investment.
  • There are some significant differences across sectors’ experiences which are affecting their confidence. Confidence and sales are strongest in the IT & Communications and Energy, Water & Mining sectors, while the Retail & Wholesale sector has weaker expectations than most others.
  • Some regions − the South West and North West, Scotland and East Midlands − have seen weaker sales growth and also various other challenges. As a result, their confidence no longer stands above typical pre-pandemic levels.

GDP

A fast-changing economic background, complicated by the Omicron variant

  • The Omicron variant weakened economic activity in December after a strong November. There was a very large fall in retail sales, and production was hit by people self-isolating.
  • Employment has, however, remained high; December saw record vacancies, and early evidence is that the economy rebounded in January.
  • Rising fuel prices have pushed up headline CPI inflation, and higher gas prices and the restoration of 20% VAT on hospitality could make the April inflation rate especially high.

In December 2021 the UK economy, along with others around the world, was disrupted by the emergence of the COVID-19 Omicron variant, resulting in a large rise in infections and a sharp increase in people self-isolating and unavailable for work. ONS data indicate that retail spending fell in the month, by a substantial 3.7%. However, that decline was partly a reflection of a strong November, helped by Black Friday, and early indicators suggest that 2022 has already seen the beginning of an economic rebound, thanks in part to the planned removal of government restrictions.

In these circumstances the main area of concern has shifted to the outlook for inflation and, associated with that, problems over labour shortages and supply chain difficulties. Job vacancies reached a record level in December, and rising fuel and energy prices have pushed up headline CPI inflation, made worse by the fact that prices a year ago were relatively low. Higher gas prices following an annual Ofgem review and the restoration of 20% VAT on hospitality could make the April inflation rate especially high.

There is, however, little evidence of rising prices feeding through to higher wage settlements, and the second half of 2022 may well see lower inflation than the first half. The government is, however, planning increases in taxes in 2022 and again in 2023.

Confidence overall

Confidence has eased but is still high, supported by rising sales

  • Confidence fell for the second quarter in a row from a record level in Q3 2021 and is essentially tracking back towards pre-pandemic normality.
  • Domestic sales have grown strongly and are projected to continue doing so, although slightly less than was expected a quarter ago. However, export sales growth is a little weaker than before the pandemic and is expected to improve only slightly over the next 12 months.
  • Among sectors, differences in confidence closely reflect variations in sales experience, and expectations for sales over the coming year.

The Business Confidence Index has fallen for the second quarter in a row, representing a gradual return towards normal after the record high achieved in Q3 2021. Historically confidence remains strong, although the Omicron variant did produce some week-to-week fluctuations within the quarter.

This confidence is underpinned by strong sales growth. Domestic sales are 5.3% higher than a year ago, the joint largest increase since Q4 2007. Companies anticipate that in a year’s time their sales will be 5.7% higher again. Although this is a slight downward revision compared with Q4’s expectation, even with inflationary pressures and some tax rises there is significant scope for UK consumers to increase their spending as employment and wages both rise and (as is likely) household confidence improves. That in turn should help to boost business-to-business sales.

On the export side there is also growth, but less so, with a rise of only 2.2% in the year to Q1 2022. Transport difficulties and trading complications caused by Brexit are likely explanations, given that most global markets have seen strong growth. But companies do expect to do better, with an anticipated rise in export sales of 4.1%. If achieved, that would be at the top end of the range of pre-pandemic performance.

Among sectors, IT & Communications and Energy, Water & Mining companies are the most confident, while Retailers & Wholesalers are among the least. These differences closely reflect sectors’ sales experience and expectations for the next 12 months.

Business challenges

Challenges continue to grow, particularly related to staff recruitment

  • Staff turnover and availability of non-management skills are, for the first time, the fastest growing challenges, reflecting the fact that some people have left the labour market and, in some cases, a possible Brexit impact.
  • There are also widespread growing transport problems, particularly affecting Manufacturing & Engineering, Retail & Wholesale, the Transport & Storage sector itself, and exporters. These problems probably reflect staff shortages.
  • Both tax concerns and complaints about the availability of government support continue to climb, whereas normally they are quite minor matters. Retailers are particularly troubled by the availability of support.

While companies are experiencing rising sales, they also face a number of obstacles, with staff turnover and the availability of non-management skills now, for the first time since the survey started in 2004, their fastest growing business challenges. Statistics from the ONS showed the highest level of job vacancies yet recorded in December, with many employers seeking to recruit all at once. Many of those who left the labour market during the pandemic have clearly not returned, and Brexit is also likely to have reduced the supply of people available to work. Companies across all sectors are affected by this, but with Transport & Storage and IT & Communications experiencing the most widespread difficulties.

Similarly, and partly because of staff shortages, transport problems are widespread and increasing, with this particularly affecting Manufacturing & Engineering, Retail & Wholesale, the Transport & Storage sector itself, and exporters. And increasing numbers of companies are concerned about the tax burden, and the availability of government support for business. National insurance rates are due to rise in 2022 and corporation tax in 2023, while government support is a particular concern for the Retail & Wholesale sector, which was badly affected in December by the rapid spread of the Omicron variant of Covid. Earlier in the pandemic, the sector was accorded 100% relief from business rates, but that was reduced to 66% in July 2021, and is due to end in April 2022. The sector also faces other challenges because of the rise of online shopping, with widespread store closures and many companies in serious difficulties.

Prices

Costs are expected to continue rising, but so are profits

  • Input costs have risen at their fastest rate in over a decade, with no slowdown expected over the next 12 months.
  • As a result, businesses are expecting large selling price increases. That, combined with stronger sales, is supporting stronger profits growth.
  • Many more companies have increased productivity than have seen it fall. This should also be helping to lessen the impact of cost pressures on profits.

Input price inflation has risen to its fastest rate (3.4%) since Q4 2008. In part this reflects growing demand for goods and services, in both domestic and international markets. However, ongoing supply-chain disruptions and transport shortages, due to a combination of pandemic and Brexit-related factors, are probably also contributing, as are higher world energy and raw material prices. Manufacturing & Engineering companies, and those in the Construction and Retail & Wholesale sectors, are seeing the greatest pressures. All three are very import-intensive, making them vulnerable to current supply-side frictions.

Over the next 12 months, businesses expect these trends to continue. Input prices are forecast to rise by 3.2%, a considerably faster rate than historical norms. Businesses are mostly able to pass on higher costs to customers. In the current quarter 2022 selling prices are 1.9% higher than a year ago, and a further rise of 2.2% is forecast over the coming year. If achieved, this will be the joint largest selling price increase since the survey began in 2004.

The combination of higher selling prices and rising sales volumes means that, despite higher costs, profits have risen and are expected to continue doing so, with an increase of 5.1% over the past year and a further 5.4% rise expected over the coming 12 months. Reinforcing that, a much higher proportion (44%) of businesses have seen their productivity rise than have experienced a decline (11%). This is also supportive of profits growth.

Employment

Salaries and employment are both on rising trends

  • Tight labour market conditions and shortages of skills mean that companies have faced significant challenges in terms of recruitment.
  • Partly in response, businesses have pushed up the salaries they pay. And they plan even faster increases over the next year.
  • Companies expect a record rise in employment in the next 12 months, suggesting that current problems with recruitment are not expected to present insuperable problems.

Labour costs are increasing for companies. Salaries have risen by 2.1% year-on-year in Q1 2022, a pace broadly in line with pre-pandemic rates. And companies anticipate faster rises in the year ahead. Their projection of a 2.7% increase in salaries, if achieved, will be the sharpest rise in just over 13 years.

This upward pressure on wages is unsurprising, given the widespread challenges that businesses are facing in terms of labour turnover, and the availability of non-management skills. In particular, wage growth expectations are strongest for Transport & Storage businesses, as the sector battles to alleviate ongoing shortages of HGV drivers. These problems may also help to explain why the overall employment growth has only just returned to pre-pandemic rates, with a 2.2% year-on-year rise in Q1 2022.

Nevertheless, a stronger rise of 3.1% is planned for employment levels over the next 12 months, suggesting that companies expect current recruitment and staff retention difficulties to ease. It is likely that some of those who left the labour market during the pandemic will gradually be drawn back into work, as and when Covid infection rates fall and remain low.

Investment

Strong capital investment plans for the year ahead. For R&D, less so.

  • Growth in capital investment has improved, with further rises planned for the next 12 months. Research & Development (R&D) budgets are also increasing, although at a slower rate.
  • Rising sales and sharp falls in spare capacity are both factors underpinning the rise in capital spending.
  • Businesses in Energy, Water & Mining and Retail & Wholesale have the strongest capital investment plans across the UK economy.

Capital investment has picked up over recent quarters, and Q1 2022 saw its annual growth rate (2.4%) firmly return to pre-pandemic norms. Businesses also plan to maintain these capital spending increases, with a further 2.5% rise expected in the year to Q1 2023. Many businesses now need to expand their capital stock, as they face mounting capacity constraints with sales and profits rebounding strongly. In Q1 2022 the proportion of companies operating with spare capacity fell to just 36% − the lowest percentage in the survey’s history.

Businesses also expect to invest more in Research & Development (R&D) over the next 12 months (2.1%), although in this case the rate of growth is not quite back to pre-pandemic levels, despite the need of companies in many sectors to face the challenge of new technology.

Across sectors, capital investment plans are strongest in the Energy, Water & Mining and Retail & Wholesale sectors. The former is having to make a gradual transition towards renewable sources of energy, while in the latter, investment is being driven by ongoing digitalisation including supply-chain management, in-store technologies, and online sales and customer services.

Confidence by sector

Significant differences have opened up in sectors’ experiences

  • The Business Confidence Index is strongest in the Energy, Water & Mining, IT & Communications and Transport & Storage sectors, and weakest in Retail & Wholesale.
  • These differences in sentiment are closely associated with sales projections, with the most confident sectors anticipating the sharpest increases in domestic sales and exports.
  • Transport problems are a particularly widespread issue in Retail & Wholesale and Manufacturing & Engineering. And staff turnover concerns are particularly prevalent in Transport & Storage and IT & Communications.

Companies in Energy, Water & Mining, IT & Communications and Transport & Storage are the most confident in Q1 2022. At the other end of the spectrum are Retail & Wholesale businesses, where sentiment has weakened considerably from recent levels.

The variations in the sector confidence index can be largely explained by differences in the sales expectations of businesses. The three most confident sectors also have the strongest growth outlooks, particularly for domestic sales. And with the exception of the Property sector, domestic sales are projected to rise at the slowest pace in Retail & Wholesale. 

Labour shortages and supply constraints are also being felt more acutely in some sectors compared to others. Transport problems are a more widespread issue for companies in Manufacturing & Engineering and Retail & Wholesale than elsewhere, while Transport & Storage and IT & Communications are the sectors with the most widespread increases in problems with staff turnover and the availability of non-management skills. Shortages of HGV drivers are probably a major explanation in the case of Transport & Storage businesses, while shortages of higher-level digital skills are likely to explain the particular challenges faced by the IT & Communications sector.

Government support is also an emerging concern across most sectors, but especially so within Retail & Wholesale and Transport & Storage. For both, the proportions of businesses reporting this as a growing challenge has risen to its highest ever rate in Q1 2022 (both 23%). Businesses in both sectors were particularly vulnerable during the pandemic and also among the most reliant on the government’s Coronavirus Job Retention Scheme. In the early stages of the pandemic, retailers were also initially the recipients of business rate relief, but this support has been reduced and will be eliminated in April 2022. The sector was also hard-hit by the Omicron variant in December.

Confidence by region and nation

Some nations and regions have seen business confidence moderate quite markedly

  • Business confidence has remained strong in most UK nations and regions. However, sentiment in Scotland, the East Midlands, North West and the South West has faltered significantly.
  • This weakening of confidence is probably linked with the more modest sales growth outlooks in these parts of the UK.
  • Among other factors, transport problems and staff turnover have risen in the East Midlands.

The Business Confidence Index has held up well in most parts of the UK, but some nations and regions have lost considerable momentum when compared to the heights of recent quarters. Sentiment has noticeably weakened for businesses in Scotland, the East Midlands, the South West and North West. Confidence here looks to be closely tied with sales projections, with the first three having weaker domestic sales growth outlooks than the UK average, and both the South West and North West particularly troubled by export sales. Linked to this, marketplace competition is a more widespread growing challenge in the North West than elsewhere in the UK.

The East Midlands has been especially challenged by transport problems and staff turnover. The percentage of companies facing difficulties in each of these areas has surged when compared to recent quarters and are both now comfortably higher than any other UK nation or region. This issue has been particularly prominent within Manufacturing & Engineering, a sector that has a large presence in the region.

Confidence by business size

The moderation in confidence is similar across all types of business

  • The easing of business confidence is evident across both large and small businesses, those that are privately owned and those that are quoted, and also those that do and don’t export.
  • Differences in sales performance are similarly small, although UK listed companies have slightly more modest domestic sales and export projections than large private businesses and small and medium-sized enterprises (SMEs).
  • Government support is a widespread challenge for SMEs, while regulatory concerns are particularly pressing for UK listed businesses. Transport problems are weighing more heavily on exporters than non-exporters.

The overall pattern of business confidence remaining firmly in positive territory but weaker than the highs of recent quarters applies across all types of companies, by size, ownership and whether or not they export.

Sales performance is generally similar across different types of companies, although there are some small variations. Both UK listed and non-UK listed companies have slightly weaker expectations for domestic sales and export growth in the year ahead, when compared to large private businesses and SMEs. Possibly linked to this, marketplace competition is a more prominent challenge for UK listed businesses than for any other company types. 

Regulatory worries are also higher for UK listed companies than for others. However, government support is most widely cited as a growing challenge among SMEs (18%). Transport problems have grown much more for exporters than non-exporters. This may reflect the ongoing logistical problems businesses are facing at shipping ports and airports due to frictions from Brexit and, of course, the pandemic. A heavier reliance on HGV drivers to export goods may also be part of the explanation.

  1. Sign up to the BCM newsletter
Contributing

If you're an ICAEW member working in industry or commerce you might be called to give an opinion on the economic prospects facing your organisation - please spare a few minutes to take part. Your views will provide information on matters of key concern to a broader businesses community, policy-makers and the media.

Using BCM data

If you'd like to use this data in a publication or share it with clients, please tell us in advance by emailing bcm@icaew.com, and make sure to reference 'ICAEW Business Confidence Monitor' in full whenever you are citing the data.